BOSTON | ATLANTA | CHARLOTTE | CHICAGO | DETROIT | LAS VEGAS | PORTLAND | SAN FRANCISCO
NEPC FOLLOW-UP PRESENTATION
90 DAY WORK PLAN
March, 2018
Doug Moseley, PartnerWill Forde, CAIA, ConsultantKevin Leonard, Partner
NEPC, LLC
INTRODUCTION
EXECUTIVE SUMMARY
NEPC has worked with Staff to develop a 90 day work plan with the goal of identifying priorities related to asset allocation and manager reviews
NEPC will present the work plan to the Committee at the March meeting and look for feedback as well as any necessary additions
To date, NEPC has partnered with Staff and SIC managers to gain perspective on the SIC asset allocation and manager implementation
NEPC & Staff conducted a working onsite in March to further discuss expectations and areas of focusNEPC has conducted calls/meetings with SSGA, PIMCO, and WAMCO and will continue reaching out to the remaining managers over the next few weeks
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WORK PLAN: PHASE 1-3
Phase 1
Discuss Asset Allocation
Implementation
Begin Performance Data Collection
Initiate Manager Search
(as needed)
Quarterly Performance Report
Re-occurring Quarterly Call With
Treasurer
Actuarial Data Collection
Board/Committee Items
Staff Items
Present Work Plan
SIC Risk Analysis
Phase 2 Phase 3
Existing Manager Review
SSGA QVM Update & Review
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WORK PLAN: MONTHLY SIC MEETINGS
SIC Meetings NEPC Items
Phase 1 March
Present Draft Work Plan
Discuss Asset Allocation Implementation
Phase 2
April Existing Manager Review
May
SSGA QVM Manager Presentation & Review
Initiate Manager Search(s) - if necessary
Phase 3 June SIC Risk Analysis
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PHASE 1-3
Target Actual (2.28.18) Difference Target
Ranges*
US Equities 20.8% 23.0% 2.2%Int'l Equities 14.4% 18.5% 4.1%Emerging Int'l Equities 4.8% 4.6% -0.2%Total Equity 40.0% 46.1% 6.1% +/- 2%Private Equity 11.3% 6.0% -5.3%Non-Core Real Estate 2.3% 2.1% -0.2%Opp. Private Credit 1.5% 0.3% -1.2%Private Growth 15.1% 8.4% -6.7% +/- 4%HY Infrastructure 1.0% 1.7% 0.7%REITs 1.0% 0.0% -1.0%Liquid Credit 2.8% 4.3% 1.5%Private Credit 3.2% 0.9% -2.4%Income 8.0% 6.9% -1.2% +/- 2%Treasury Duration 4.0% 4.0% 0.0%Systematic Trend 4.0% 3.6% -0.4%CPC 8.0% 7.6% -0.4% +/- 2%Core Real Estate 3.6% 5.1% 1.5%Private Infrastructure 2.4% 1.6% -0.8%TIPS 1.0% 2.4% 1.4%Natural Resources 1.0% 0.0% -1.0%Inflation Protection 8.0% 9.1% 1.1% +/- 3%Investment Grade Fixed 11.5% 11.1% -0.4% +/- 2%Abs. Return 6.5% 6.9% 0.4% +/- 2%Cash 3.0% 3.4% 0.4% +/- 2%Vol. Protection 21.0% 21.4% 0.4%
Short-Term Tactical 0.0% 0.3% 0.3%
PHASE 1: AA IMPLEMENTATIONNEPC to discuss implementation of SIC’s current asset allocation with the Committee
Discuss implementation and funding of SIC’s 1.0% target to CommoditiesIn addition, discuss the implementation of the SIC’s 2.8% target to Liquid Credit and the custom mandates of the existing managers
Consider implementation and funding of Commodities target
Review implementation of Liquid Credit allocation
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*The above target ranges were approved at the September, 2016 meeting
PHASE 1 (CONT.): CURRENT VS. TARGET ALLOCATION
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Actual
Actual w. Commodities
Target
‐0.6%
‐0.4%
‐0.2%
0.0%
0.2%
0.4%
0.6%
‐0.6% ‐0.4% ‐0.2% 0.0% 0.2% 0.4% 0.6%
Margina
l Return
Marginal Risk
Private Markets underweight
PHASE 2
NEPC to conduct a review of and recommendation on the SIC Managers NEPC to review each manager and its role within the portfolioThe goal of the exercise is to provide the Committee with a buy, hold, or sell recommendation on each active manager
As an initial step, NEPC has provided preliminary ratings for each manager until a more detailed review can be conducted in April
PHASE 3Conduct Risk Analysis incorporating both asset allocation and liability info
Analysis is likely to include:o Scenario Analysis o Stressed Testing o Liquidity Analysis
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MANAGER EVALUATION
NEPC RATING DESCRIPTORS & DEFINITIONS
Rating Rating Descriptor Definition
1 PreferredA high conviction investment strategy. A 1 (Preferred) rated strategy has a compelling and sound investment thesis, and the manager is well-resourced and incented to execute on the thesis.
2 Positive
NEPC has a positive view of the strategy. Strategy has a compelling and sound investment thesis. The manager is sufficiently resourced and incented to execute on the thesis. Strengths outweigh the weaknesses.
3 NeutralNEPC has a neutral view of the strategy. Strategy lacks a compelling investment thesis. There are no significant concerns with the manager.
4 Negative Strategy lacks or has an unclear investment thesis. The strategy’s weaknesses clearly outweigh its strengths.
5 Not Recommended
A strategy that lacks an investment thesis or NEPC has no confidence in the strategy’s ability to execute on the thesis. Serious issues have been identified with the investment manager or strategy.
NR Not Rated NEPC has not performed sufficient due diligence on the product or manager.
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EXISTING MANAGER REVIEW: USING NEPC’S MANAGER RATINGS
*PIMCO & WAMCO are Preferred strategies on NEPC’s Multi Sector Fixed Income Focused Placement Lists
Active Manager Roster Rating Notes
Total EquitySSGA QVM Tilt 2 POSITIVE
IncomePIMCO Custom Credit* 3 NEUTRAL NEUTRAL Rating until a more detailed review can be conductedWAMCO Custom Credit* 3 NEUTRAL NEUTRAL Rating until a more detailed review can be conductedHarvest MLP Alpha 3 NEUTRAL NEUTRAL Rating until a more detailed review can be conducted
Inflation ProtectionBBH US TIPS 1 PREFERRED BBH is a Preferred manager on NEPC's US TIPS FPL
Vol. ProtectionFidelity Core Constrained Fixed 1 PREFERRED Fidelity is a Preferred manager on NEPC's Core Fixed FPLMackay Shields Core Inv. Grade 3 NEUTRAL NEUTRAL Rating until a more detailed review can be conducted
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APPENDIX
Kevin Leonard, Partner Phone: 617 314 3128Email: [email protected]
NEPC’S TEAM
Consulting Team
Doug Moseley, Partner Phone: 617 314 3140Email: [email protected]
Jake Mallinson, AnalystPhone: 617 299 3408Email: [email protected]
Will Forde, CAIA, ConsultantPhone: 617 314 3154Email: [email protected]
Research
Phil Nelson, CFA, Partner Phone: 617 314 3125Email: [email protected]
Performance Analytics
TBDPhone: TBDEmail: [email protected]
Doug Moseley, Partner Phone: 617 314 3140Email: [email protected]
Will Forde, CAIA, ConsultantPhone: 617 314 3154Email: [email protected]
Zachary NoePhone: 617 314 3144Email: [email protected]
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• Douglas W. Moseley, Partner– Twenty-two years' investment experience– Member: Discretionary Committee; Traditional Due Diligence Committee; – Fixed Income Advisory Group– Previous affiliations: Massachusetts PRIM Board; State Street Bank & Trust – MBA, Bentley College; BS, University of Massachusetts– Board Affiliations: NCPERS Executive Board, Quincy Community Action Program
• William Forde, CAIA, Consultant– Seven years' investment experience– Member: Asset Allocation Committee– Previous affiliation: Brown Brothers Harriman – BA, Tufts University – Level 3 CFA Candidate
• Kevin M. Leonard, Partner– Twenty-five years' investment experience– Head of the Public Fund Consulting Practice– MML Public Fund Consultant of the Year (2012)– Member: Traditional Due Diligence Committee; Large Cap Equity Advisory Group– Previous affiliations: Segal Advisors; The Hannah Consulting Group; State Street Bank
and Trust Company– BA, Assumption College
CONSULTING TEAM
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• Phillip R. Nelson, CFAPartner, Director of Asset Allocation
– Fifteen years' investment experience– Member: Asset Allocation Committee; Traditional Due Diligence Committee; Liability-
Driven Investment (LDI) Advisory Group– Previous affiliations: Pinnacle West Capital Corporation; Yoshikami Capital
Management; Merrill Lynch– BA, University of California Irvine
ADDITIONAL RESOURCES
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Understand and define objectives– Fund benefit obligations, meet short and long-term liquidity requirements, and
incorporate any investment constraints
Apply multiple perspectives/tools to build robust, objective driven asset allocation solution
– Identify opportunities for enhancing portfolio structure– Align with the expected progress of liabilities and cash flows
NEPC typically conducts an Asset-Liability study in conjunction with any significant changes to a client’s asset allocation
FOUNDATIONS OF ASSET-LIABILITY STUDY
Identify Key Issues
Multi-Faceted Risk Assessment
Projection of Assets & Liabilities
Asset Allocation Recommendation
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ANALYTICAL MODELING TOOLS
NEPC uses a variety of proprietary tools developed to assess strategic asset allocation changes and the impact of tactical adjustments
Please note that all investments carry some level of risk. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Approach Advantages Shortcomings
Mean-Variance • Calculates most efficient portfolio for given volatility• Produces range of portfolios
• Relies on static assumptions and assumes normal distribution
• Chosen constraints can drive results• Limits risk definition to volatility
Liquidity Analysis • Recognizes a “risk” not captured in traditional tools: illiquidity
• Highlights impact of changing cash flows (both investment-driven and exogenous)
• Requires portfolio specific cash flow and partnership details
• Long-term planning tool – cannot easily adjust portfolio or compare different portfolios
Scenario Analysis • Focuses on low-probability, high magnitude economic environments (tail risks)
• Recognizes environmental biases of each asset class
• Offers opportunity to test risk tolerance to various outcomes but should not be used to construct best portfolio for each environment
Risk Budgeting • Provides risk allocations• Recognizes that less efficient portfolios may have
better risk balance
• Relies on mean-variance optimization assumptions• Defines risk as standard deviation• Ignores tail risks
Factor Analysis • Recognizes underlying economic drivers of asset class volatility
• Can identify risk concentrations across asset classes
• Requires intuitive belief of asset class relationships to underlying factors – less quantitative and more qualitative
Active Risk Budgeting
• Assesses which managers are driving risk-budget and calculates correlation of alpha’s across manager line-up
• Relies on historical manager returns to set expectations of risk and correlation
Stochastic Forecasting
• Shows range of results based on Monte Carlo simulation
• Includes natural feedback loops
• Percentiled results show ranges but not reasons • Each simulated trial represents a possible but highly
unlikely path
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• Base Case: negative net cash flows; some loss of liquidity
• Stressed Case: liquid assets wiped out; forced unwinding of some illiquid positions
• Favorable Case: positive cash flows; liquidity profile improves
LIQUIDITY ANALYSIS: POSSIBLE RANGE OF 5-YEAR CASH OUTFLOWS (EXAMPLE)
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• Scenario analysis tests the viability of asset mixes under multiple economic scenarios
• Advantages– Allows better understanding of risk
exposures under contrasting inflation and economic growth regimes
– Can reveals risk tolerance under various economic environments
– Scenarios can be customized to examine fund outcomes as markets adjust and specific risks become a concern
• Disadvantages– Doesn’t reflect views on the
likelihood of various economic environments
Overextension
Stagflation
Recession
Expansion
SCENARIO ANALYSIS
BaseCase
Low Inflation
High InflationHigh Growth
Low Growth
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RISK BUDGETING: RISK ALLOCATIONS BY ASSET CLASS (EXAMPLE)
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